Last year saw a record number of reverse merger transactions, with 398 reverse mergers valued at nearly $135 billion,
In a reverse merger, a privately held company acquires a publicly traded company, enabling the private company to gain access to public equity markets without going through the lengthy process of an IPO filing. Although a reverse merger typically has the advantage of a shorter timeline over an IPO, companies should keep in mind some requirements, particularly as SEC scrutiny has recently increased around reverse mergers, both of the SPAC and non-SPAC variety.
Among these requirements are fair value measurements related to
Issues to consider in a reverse merger
Sometimes in a reverse merger, a question may arise as to whether a control premium should be applied to the consideration being paid. This will require the valuator to understand the terms of the purchase agreement and whether a control element has already been priced into the transaction. For example, in the acquisition of a limited partnership, a general partner may have also been acquired in the transaction. Often, the amount paid for this general partnership interest may represent the “control” factor, i.e., the ability to affect change in the projected cash flows, above and beyond the acquisition of the limited partnership.
Another issue that may arise in a reverse merger is the existence of noncontrolling interest. In some instances, certain shareholders may elect not to participate in the exchange transaction. In such instances, the value of the noncontrolling interest would need to be measured, and this value would be based on the value of the standalone company in which the noncontrolling interest is held, not on the value of the combined entity.
In the event of a reverse merger, these considerations, along with the associated accounting considerations, make it more critical than ever to have a strong, defensible valuation supporting the purchase price allocation.